A surety bond's promise to respond to claims within 45 days has a built-in enforcement mechanism, the Court of Special Appeals has held: After that time, failure to contest the claim constitutes a waiver of all defenses.
The decision leaves the sureties on the Hyatt Regency Chesapeake Bay Resort in Cambridge liable to a golf course developer for $750,000.
"[T]o read the time period within which the surety 'shall' respond to the claims in any way other than as imposing a mandatory time limit upon the surety for contesting the claim borders on the nonsensical, as it renders the 45-day time requirement essentially nugatory," Judge Mary Ellen Barbera wrote for the appeals court.
Although the bond at issue was a standard form in use since 1987, "we found no cases in Maryland or elsewhere interpreting the language of [the 45-day provision] or, for that matter, any other provision of this form," Barbera noted.
The court affirmed a win for Wadsworth Golf Construction Co. of the Midwest, hired by general contractor Clark Construction Group Inc. to create the 18-hole golf course at the Hyatt.
Sited on the Choptank River, the luxury resort was financed with bonds sold by the Maryland Economic Development Corp.
Cost overruns and disputes delayed the project three times, pushing the opening date back from December 2001 until August 2002.
"[S]ometime in late 2001, MEDCO discontinued payments to Clark, causing Clark, in turn, to discontinue payments to Wadsworth," the opinion notes.
In March 2002, Wadsworth notified the sureties -- National Union Fire Insurance Co. of Pittsburgh, Federal Insurance Co., and Fidelity and Deposit Company of Maryland -- that it had completed construction of the golf course and that Clark still owed it about $721,000.
Federal Insurance acknowledged receipt of the claim and forwarded it to American International Group.
AIG soon sent Wadsworth a proof of claim form, which Wadsworth completed and returned on May 3, 2002.
A few days later, AIG acknowledged receipt of the form, promising to "immediately take this matter up" with Clark and respond to Wadsworth "in due course."
Two months passed, and Wadsworth heard nothing further from the sureties. It sent a second letter on July 23, 2002, which got no response, Barbera wrote.
On Nov. 6, 2002, Wadsworth filed suit for $750,000 in Dorchester County Circuit Court, along with a motion for summary judgment.
In response, the sureties argued that Wadsworth's claim was premature because a suit between Clark and MEDCO was pending in circuit court.
Hearing the case for the circuit court, Judge Marvin H. Smith rejected that reasoning. The Court of Special Appeals affirmed.
"The problem the Sureties have in making this argument is that it could have been, but was not, asserted in the answer to Wadsworth's Proof of Claim," Barbera wrote.
Upon receipt of what it believed was a premature claim, "it was incumbent upon the surety to dispute the claim on the ground that payment is not yet due," the court held. "If the surety does not do so, the terms of the payment bond require it to proceed promptly with payment of the undisputed claim."
(The court expressly declined to address an alternate rationale the circuit judge announced in ruling for Wadsworth, namely, that it would be counter to public policy to interpret the bond so that Wadsworth's claim was contingent on MEDCO's payment to Clark.)
Equally unavailing was the sureties' argument that Wadsworth was trying to expand the terms of its contract with Clark by adding a waiver of all defenses as the sanction for a tardy response.
Rather, "had the Sureties wanted a 'non-forfeiture of defenses' provision to be included in the bond, they certainly could have included such a provision," Barbera wrote.
Allowing the sureties to ignore the bond's time for response "runs contrary to the bond's purpose of safeguarding the suppliers of goods and labor," the court concluded. "Nor can we imagine a reason for inclusion of the 45-day provision in the bond other than that it is there to be relied upon by the claimant and adhered to by the surety."
The litigation between Clark and MEDCO was still pending last week, the court said.
Source: The Daily Record (Baltimore)
